How to Measure Customer Loyalty

Published by Martha Pierson at December 21, 2021

Customer loyalty is the holy grail of marketing for one simple reason – it’s much more cost-effective to boost repeat business than to source new customers (although you need to do both). Research conducted by Bain and Company shows that it’s practically impossible to break even on new customers alone since the cost of acquiring different types of shoppers doesn’t offset the profits one-time shoppers bring.

Additionally, according to studies by Accenture, as reported in Forbes, over 90% of companies have a loyalty program. Unsurprisingly, in the U.S., there are over 3.3 billion loyalty memberships. So, loyalty itself is big business.

It is clearly something that companies care very deeply about. Let’s dig further into loyalty — why is it so important, how can you measure it, and how can you increase it?

Why is Customer Loyalty Important?

It’s a simple rule of human nature – when you enjoy an experience, you come back for more. This is as true for retail or services as it is for entertainment or travel. So, loyalty breeds repeat business, with each customer encounter more friction-free than the last.

Furthermore, happy customers act as brand advocates, bringing new customers into the fold. This fact is ably demonstrated by the rise of referral reward schemes. Whether it’s the money off gift certificates you can pass to a friend or bonuses for word-of-mouth referrals, companies are incentivizing customers to “tell your friends.” This has even created a sub-field of sales called Referral Marketing.

Customer loyalty maximization is cost-effective, too, as we’ve already learned. But perhaps the biggest reason to keep track of customer loyalty is that it provides a ready metric to assess how well you are doing. Customers will keep coming back if you provide a better-quality product or service than your competitors. Conversely, if loyalty drops off, perhaps you’ve taken the wrong approach.

Loyalty metrics inform strategy.

Metrics to Help Measure Customer Loyalty

Now that we know the importance of customer loyalty, how do we measure it, and what exactly are we measuring in any case? There are several key metrics to consider. Let’s look at half a dozen.

Net Promoter Score

The Net Promoter Score (NPS) is the aggregated result of asking the simple questions:

“How likely are you to recommend our product?”

How likely customers are to refer your product or service to others usually correlates with how likely they are to provide repeat business themselves.

If survey respondents rank their answers from one (extremely unlikely) to 10 (extremely likely), then you’re aiming for scores of at least seven to eight and ideally nine to 10.

The NPS is officially the percentage of net promoters (seven and above) minus the percentage of net detractors (six and below). For example, if you surveyed 10 people and found seven were promoters and three were detractors, then your NPS would be 40% (70% minus 30%).

Customer Lifetime Value

As its name suggests, this metric sums the value of every interaction you’ll have with an individual customer. There’s a simple formula for this:

Average Purchase Cost X Average Purchasing Frequency X Average Customer Lifespan.

Lifespan does not mean how long the customer lives, but merely how long they remain a customer. Thus, if Customer A makes four purchases a year, averaging $40 an item, and the average lifespan is seven years, your CLV would be $1,120 for this individual. It may be possible to stretch that CLV even farther using POS financing software to give them more purchasing power.

The great value of CLV is that it has predictive power. Once you’ve crunched the numbers on past customer behavior (don’t go too far back since you want to focus on current strategy), you can predict likely outcomes and re-strategize where necessary.

Repurchase Ratio

This metric analyzes the ratio between repeat customers and one-time buyers. Measuring it will give you a good idea of how satisfied customers are with the products or services they received.

The repurchase ratio can also help you shape your policies by targeting new marketing strategies. For example, an Adobe study showed that 40% of revenue from all U.S. businesses came from repeat buyers.

This metric is a little complex to calculate since you first must specify what constitutes repeat business. For instance, a customer who makes two purchases from you in five years might not be considered a repeat customer if the average recurring customer makes six buys per year.

Defining your parameters, then calculating your company’s repurchase ratio helps set priorities in terms of pursuing new business versus focusing on loyalty programs and customer satisfaction. Forgetting this important step is one of the reasons a business loses customers.

Upsell Ratio

Easily confused with the repurchase ratio, this measure tracks how many existing customers buy new and more expensive items. For instance, how many iPhone 12 users will buy the new iPhone 13? It may also include cross-selling (such as adding accessories into product bundles). Dating apps use this metric, with companies measuring the percentage of free, basic memberships against paid, premium ones.

Upselling to existing customers is a far likelier outcome than securing a brand-new customer by a significant margin. According to “Marketing Metrics,” the probability of selling to an existing customer could be as high as 60% to 70%, compared to a 5% to 20% likelihood of new business.

Customer loyalty is maximized by offering genuine value with upselling and cross-selling, rather than replacements for disappointing and quickly redundant products.

Customer Loyalty Index

Consumer taking survey on laptop.

This is another measure you can ascertain via customer satisfaction surveying. It’s an average score across the numerical answers your customers give to three questions:

  • How likely are you to recommend us to friends and family?
  • How likely are you to buy from us in the future?
  • How likely are you to try our other products?

These three questions help build a composite picture of customer loyalty.

This is usually done by assigning a score between zero and 100 in increments of 20, such that on a six-point scale, zero equals most negative and 100 equals most positive response. A six-point scale is used to prevent respondents from “fence-sitting” by choosing an exact midpoint.

For the above three questions, if a customer responded with a four, six, and five, respectively, this would translate to a 60, 100, and 80. The average CLI would be (60+100+80)/3 = 80.

Customer Engagement Score

Subtly different from the other measures, this score can be vital to businesses offering a subscription model or a cloud-based software solution. It tracks the intensity of usage of digital products and services.

How you measure this metric very much depends on the nature of the product you’re offering. YouTube, for instance, provides engagement metrics for its content creators based on total and average minutes watched per video, number of comments and likes, and number of unique video views.

Depending on your use case, you could also track page visits, the number of products considered, time on site, click-throughs, and many other indicators of engagement.

Clearly, such metrics work better for eCommerce and digital products than brick and mortar stores. However, you can also use tracking via store cards and memberships to provide valuable data on customer engagement in the physical world too.

Loyalty Programs

Consumer buying clothing online.

These are a great strategy for gauging customer loyalty while promoting it. They provide you with a slew of new data, allowing you to measure even more metrics, including the following:

  • Redemption Rate (coupons redeemed / coupons issued)

A loyal customer will usually redeem over 20% of product offers and coupons. If this is not happening, it could be that your coupon scheme isn’t working. Perhaps you’re not offering sufficient value, or you’ve made redemption too challenging.

  • Active Engagement Rate (the number of customers who engaged / total number of customers)

Since loyalty schemes usually include scannable cards or coupon codes, their usage can be tracked. Again, the question is whether your loyalty scheme is attractive to a high enough proportion of customers.

You can also break this down by demographics, geography, age, and gender, depending on what information customers on the scheme have provided and what you know about your wider customer base.

Under this metric, you only count customers who gained or redeemed points rather than those who simply signed up for the scheme. The latter is covered by:

  • Participation Rate (number of program members / total number of customers)

This metric could potentially tell you as much about your sales or marketing personnel and strategy as your customers’ behavior. For example, if your participation rate is low, perhaps you haven’t advertised or sold the scheme particularly well or made signing up a longwinded process.

To Sum Up

Loyalty metrics are a fantastic way to ascertain customer behavior and assess the success or failure of your marketing strategy. Understanding them can even help you set your fixed and variable costs for maximum profits.

These metrics are relatively easy to measure, straightforward to understand, and will help you maximize revenue by focusing your marketing strategy in the most cost-effective and successful direction. Loyalty programs are a proven method for boosting customer data and loyalty at the same time, which explains their stratospheric growth.

No business can be without these measures, particularly in an environment of increasing competition, where knowing how to earn customer loyalty is vital to longevity.


Martha Pierson

Editor-in-ChiefMartha is Editor-in-Chief at Finturf.com. Her career began in 2003 when she started as an investment banking analyst. Martha continued her career path as a financial advisor for investments. She has a passion for writing and is mainly focused on covering financial and business management topics.

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